Economics 3 Marks Question

Following are the demerits of the flexible exchange rate system:
i. Instability and uncertainty- Flexible exchange rate system creates situations of instability and uncertainty. There are wide fluctuations in exchange rates that hamper foreign trade and capital movements between countries.
ii. Speculation- Flexible exchange rate encourages speculation.
iii. International trade and investment- Flexible exchange rate discourages international trade and investment by causing fluctuations in the value of a currency.
iv. Dampening effect on foreign trade

Official reserve transaction is the change in the forex reserve with RBI.
Official reserve transactions are the transactions made by the Central Bank which cause changes in its official reserves of foreign exchange.
It is recorded in the capital account of BoP. Any decrease in reserve is recorded in the credit side and an increase in forex recorded in the debit side of the capital account of BoP.
(St must be noted only change is recorded)

Gross domestic product at market price is the market value of final goods and services produced within the domestic territory of a country during the period of an accounting year, inclusive of depreciation. While net domestic product at market price is the market value of the final goods and services produced with in the domestic territory of a country during the period of an accounting year, exclusive of depreciation.